INHERITANCE TAXES ARE DRAINING JAPAN’S LIFEBLOOD

BUSINESS WEEK / January 24, 2000

Economics

COMMENTARY
By Emily Thornton

INHERITANCE TAXES ARE DRAINING JAPAN'S LIFEBLOOD

Shigetaka Koyanagi's father started a chain of eyeglass stores in Tokyo amid the rubble of World War II. But when his father died, Koyanagi inherited much more than the business. He also fell heir to a monstrous inheritance-tax bill. For two decades, Koyanagi, now 75, has taken loans to pay his roughly $1 million annual tax bill and keep his 60 Kimpodo Ltd. Stores - even though he helped his father start them. Says Koyanagi: "I had to pass up many chances to open new outlets and to pursue new ventures to make those payments."

Koyanagi's dashed hopes show how death and taxes are hampering Japan's recovery. Although Japan Inc. desperately wants to nurture small businesses to create new jobs and revitalize its economy, Japan's small fry complain that high inheritance taxes force them to ditch opportunities for growth. It's time policymakers paid attention to these family businesses and handed them a lighter tax bill.

STALLING? A cut in the inheritance tax is a simple way to get investment capital to work fast. Indeed, Prime Minister Kelzo Obuchi wants to slash Japan's minimum inheritance-tax rate of 70% to 50%. But the Ministry of Finance opposes a tax cut, since it benefits only a wealthy few. Just 5% of all Japanese pay inheritance taxes, according to the Ministry. Instead, MOF wants the government to review Japan's entire inheritance-tax structure. A more aggressive overhaul is probably the right move. Trouble is, MOF's counterproposal could be a stalling tactic, since the government relies on inheritance taxes for $18 billion annually, or 4% of its budget, which runs a large deficit.

At the heart of this battle lies a fundamental conflict: Japan needs a little greed to get its economy going at full throttle. Yet the country has long prided itself on being a middle-class society without much income disparity. Such egalitarianism has come at a high price for family-run businesses. High inheritance taxes - carrying a maximum rate of 70% on assets of more than $18.5 million, vs. 55% in the U.S. - have sapped capital and robbed entrepreneurs of the ability and the will to expand. "We need to lower taxes so everyone feels that if they work hard, they too can become rich," says Chiba University of Commerce President Hiroshi Kato, who chairs the government tax commission. "Japan must create a system that will encourage people to work."

With consumer sales still in a slump, small shops - particularly those in high-priced areas such as Ginza - struggle to pay their taxes. One in six small companies calls the tax a problem. "It is one of the reasons businesses are forced to close," says Fumihiko Sekiguchi of the Tokyo Chamber of Commerce & Industry.

"CRAZY." Some shop owners are forced to sell land surrounding their homes just to raise the money. "We keep saying that Japan's inheritance tax is crazy," says Yuji Ishimaru, former secretary general of the Ginza Street Assn.

It's difficult to break the cycle. Many small and midsize companies cannot afford to expand and keep up with tax payments at the same time. Yet many cannot sell assets, since potential buyers are also scarce. And as Japan's population ages, more entrepreneurs are frustrated at their inability to hand their businesses over to their children without also sentencing them to lifetimes of tax payments. "As the number of second-generation managers increases, so will this problem," says Nobuhiro Ohsuga of the KSD Foundation for Promoting the Welfare of Independent Entrepreneurs, noting that 30% of small business owners are over age 60.

To the government, the income loss should be a small price to pay if a tax cut takes enough pressure off business owners to encourage them to spend and expand. The government has already slashed corporate and income taxes. Inheritance tax should be next. Says Koyanagi: "I could have made my company larger. I could have pursued an entirely different business. But none of that was possible." It'' time for Japan's leaders to make it possible.